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AQA A-level Business > 3.7 Analysing the strategic position of a business > Flashcards

3.7 Analysing the strategic position of a business Flashcards

1
Q

SWOT analysis

A

STRENGTHS –> strong brand name, skilled employees

WEAKNESS –> lots of long-term borrowing, under utilised capacity

OPPORTUNITIES –> gap in market, rising income levels

THREATS –> change in consumer tastes, competitors

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2
Q

SWOT analysis - ADVANTAGES

A

Low cost and simple technique

Allows business to focus on internal & external factors

Logical structure

Helps managers recognise & assess in risks to the business

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3
Q

SWOT analysis - DISADVANTAGES

A

Doesn’t take into account everything –> lacks focus

Doesn’t offer any solutions

Can become quickly out of date

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4
Q

Balance Sheets & net assets

A

A balance sheet represents the businesses assets (possessions) and liabilities (debts) on a particular day

Net assets shows the what would be left to the owners if all assets were sold and all liabilities were paid –> the value of the business

Net Assets = (current assets + non current assets) - (current liabilities + non current liabilities)

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5
Q

Financial Ratios - PROFITABILITY RATIO (roce)

A

ROCE shows the measure of success of a business through profit

ROCE = operating profit / total equity + non current liabilities x 100

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6
Q

Financial Ratios - LIQUIDITY (current ratio)

A

Current ratio measures the ability of a business to pay its debts

Current ratio = current assets / current liabilities

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7
Q

Financial Ratios - GEARING

A

Measures how much of the business is based on borrowed money

Gearing = non current liabilities / total equity + non current liabilities x 100

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8
Q

Financial Ratios - EFFICIENCY RATIOS (payable & receivable days, inventory turnover)

A

Payable days = payables / cost of sales x 365

Receivable days = receivables / revenues x 365

Inventory turnover = cost of sales / average inventories held

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9
Q

Value of financial ratios when assessing performance - ADVANTAGES

A

Encourages a systematic approach when analysing performance

Allows managers to evaluate companies performance and compare it to other businesses

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10
Q

Value of financial ratios when assessing performance - DISADVANTAGES

A

They don’t address issues like product quality, customer service, employee morale

Ratios largely look at the past, not the future

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11
Q

Core competences

A

Core competences - the unique abilities that a business possesses in order to ensure competitive advantage

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12
Q

Importance of core competences

A

Allows businesses to take full advantages of opportunities to enhance performance & provide competitive advantage

Core competences add value to the business –> competitiveness and market power increases

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13
Q

Criticisms of core competences

A

Over zealous outsourcing has damaged business competitiveness

Difficult to identify core competences that are genuinely unique

Possible for a business to become complacent about its core competences

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14
Q

Kaplan & Norton’s Balanced Scorecard model

A

Developed to help firms measure business performance using both financial and non-financial data.

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15
Q

K & N balanced scorecard model - THE 4 PERSPECTIVES

A

FINANCIAL –> e.g. revenues from sales, ROCE, cashflow

CUSTOMER –> e.g. customer satisfaction and loyalty

INTERNAL PROCESSES –> e.g. productivity, quality, unit costs

LEARNING & GROWTH –> e.g. training, employee engagement

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16
Q

Balanced Scorecard - ADVANTAGES

A

Broader view of business performance

Involves everyone in the business (not just financial stakeholders)

Highly flexible

Links performance to long-term vision & goals of the business

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17
Q

Balance Scorecard - DISADVANTAGES

A

Senior management may still be too concerned with financial performance

Needs to be updated regularly to be useful

Can become complicated due to their being lots of data —> therefore requires strong leadership

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18
Q

Elkington’s Triple Bottom Line

A

A way of assessing business performance based on 3 important areas including:
1 )Profit
2) People
3) Planet

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19
Q

Elkington’s TBL - PROFIT

A

Familiar to managers

Figures recorded in a businesses financial statements

Profit helps sustain the broader community in which the business operates within

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20
Q

Elkington’s TBL - PEOPLE

A

Measures the extent to which a business is socially responsible

Takes into account :
1) Health & safety matters e.g. working conditions
2) Financial matters e.g. fair rates of pay for employees
3) Fair trade –> improving living standards in less developed countries to promote sustainable methods of production

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21
Q

Elkington’s TBL - PLANET

A

Measures the impact of business on environment

E.g. A business might:
1) reduce carbon emissions
2) reduce quantity wasted
3) using sustainable raw materials

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22
Q

Elkington’s TBL - ADVANTAGES

A

Encourages businesses to think beyond narrow measure of performance which is just profit

Encourages CRS pyramid

Supports measurement of environmental impact & extent of sustainability

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23
Q

Elkington’s TBL - DISADVANTAGES

A

Not very useful as overall measure of business performance

Hard to reliably and consistently measure PEOPLE & PLANET

No legal requirement to report it –> so take-up has been poor

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24
Q

Political Environment - ENTERPRISE (financial support)

A

Enterprise - starting & developing your own business

UK gov supports enterprises –> this encourages ppl to expand & establish their new businesses –> helps reduce the risk of it failing

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25
Q

Political Environment - ENTERPRISE (non financial support)

A

UK gov provides a range of support, advice & inspiration for entrepreneurs establishing and growing their businesses

E.g. guidance on recruiting staff, marketing, improving leadership

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26
Q

Political Environment - REGULATION ON FREE & FAIR COMPETITION

A

Regulation - enforcement of rules

1) Imposing windfall taxes (taxes on excessive profits)
2) Controlling prices
3) Restricting ROCE –> prevents excessive profits

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27
Q

Political Environment - REGULATION OF PRIVATISED INDUSTRIES

A

UK gov privatised many monopolies (single supplier in a market) e.g. gas

Regulators such as OFWAT ensured:
1) consumer interests were protected
2) Monopolies don’t charge excessive prices or make excessive profits

28
Q

Political Environment - IMPACT OF REGULATION

A

Threat to businesses as they can’t maximise profits

Adverse publicity

Leads to lower risk decisions

BUT can provide a more stable & long term business environment

29
Q

Political Environment - INTERNATIONAL TRADE

A

Selling goods and services to international markets

Links to globalisation –> markets becoming worldwide in scope

30
Q

Political Environment - IMPACT OF INTERNATIONAL TRADE

A

Allows businesses access to wider range of customers

Increased sales and lower costs too

HOWEVER… there will be greater competition to deal with

31
Q

Legal Environment - COMPETITION

A

1) CARTELS - 2 or more businesses working together to limit competition e.g. controlling prices —> leaves consumers & economy damaged

2) ABUSE OF A DOMINANT MARKET POSITION - economic strength enjoyed by a business –> enables to prevent competition

3) ANTI-COMPETITIVE PRACTICES - actions taken by business to limit rivalry within a market e.g. suppliers agreeing not to sell to competitors

32
Q

Legal Environment - INDIVIDUAL LABOUR LAW and COLLECTIVE LABOUR LAW

A

individual labour law - Relates to individual employees e.g. National Minimum Wage Act 1998

Collective labour law - Relates a trade union / group e.g. Trade Union act

33
Q

Economic Environment - GDP

A

The total value of a country’s output over a given period of time

Business Cycle includes 4 different stages:

1) RECOVERY - production rises, increase in consumer expenditure
2) BOOM - profits are high but so are costs, increasing inflation
3) RECESSION - demand & profit falls, interest rates are reduced
4) SLUMP - unemployment, low consumer spending

34
Q

Economic Environment - TAXATION

A

Payments made to the gov by households and businesses

Direct tax –> tax on income & profits
Indirect tax –> taxes on spending

Different types of tax include:
1) income tax
2) VAT
3) national insurance
4) corporation tax

35
Q

Economic Environment - EXCHANGE RATES

A

Price of one currency in terms of another

SPICED

Appreciation - pound rises –> prices of UK exports overseas increases while prices of imported goods in the UK fall

Depreciation - pound falls –> prices of UK exports overseas falls while prices of imported goods in the UK increases

36
Q

Economic Environment - INFLATION

A

Persistent rise in price for all goods and services

Consumer Price Index (CPI) - measures the rate of inflation

37
Q

Economic Environment - EFFECTS OF INFLATION ON CONSUMERS

A

CONSUMERS:
1) Increase in inflation = money loses its value –> so people lose confidence in money as the value of savings is reduced

2) Increase in inflation lead to higher wage demands as people try to maintain their living standards

38
Q

Economic Environment - EFFECTS OF INFLATION ON BUSINESSES

A

ADVANTAGES:
1) Growing revenues + constant gross margin = higher gross profit
2) Higher prices enables revenues to increase

DISADVANTAGES:
1) Inflation leads to increase in costs –> business may not be able to pass them onto customers
2) Inflation = higher interest rates –> reduces economic growth –> recession

39
Q

Economic Environment - FISCAL POLICY

A

Use of taxation and gov expenditure to change level of economic activity

Two Types of fiscal policy:
1) EXPANSIONARY - increase level of economic activity
2) CONTRACTORY - reduce level of economic activity

40
Q

Economic Environment - MONETARY POLICY

A

Controlling amount of money / interest rates to achieve desired level of economic activity

41
Q

Economic Environment - MONETARY POLICY (impacts of rising interest rates)

A

Reduced level of consumer spending
Slows down GDP growth
Decreases inflation –> because people have less money to spend

THEREFORE…
Business may experience falling demand & sales due to increase in savings

42
Q

Economic Environment - MONETARY POLICY (impacts of falling interest rates)

A

Reduced levels of unemployment
Increase in GDP growth

THEREFORE…
Demand & sales for businesses are likely to increase

43
Q

Economic Environment - OPEN TRADE

A

Open trade involves the removal or reduction of barriers to international trade

INTERNATIONAL TRADING BLOCS - group of countries in a geographical area who aim to protect themselves from other countries outside their group

44
Q

Economic Environment - PROTECTIONISM

A

Gov policy to prevent the free entry of imports into a country

E.G.
1) Tariffs - tax on imports

45
Q

Globalisation

A

Globalisation - a process in which economies have become increasingly integrated

46
Q

Importance of Globalisation - ADVANTAGES

A

1) Increased sales, revenue & profit
2) Cheaper resources
3) Economies of scale ( because of increased production

47
Q

Importance of Globalisation - DISADVANTAGES

A

1) Inflation
2) Increased need for investment –> more competition means need more efficiency and R&D
3) Threat of takeover

48
Q

Importance of Emerging Economies - STRENGTHS FOR BUSINESS’S

A

Emerging economy - a country with low income per head slowly developing through high economic growth (GDP)

1) Increase in GDP = higher disposable incomes = higher demand = increased sales, revenue and profits for a business
2) Low cost production opportunities
3) Natural resources to exploit e.g. in Brazil

49
Q

Importance of Emerging Economies - RISKS FOR BUSINESSES

A

1) Inflation

2) Protectionism from emerging countries

3) Adverse publicity = brand reputation damaged through low costs –> as employees may be exploited through low income

50
Q

Social Environment - URBANISATION and MIGRATION

A

URBANISATION - Movement of people from the countryside to live in cities e.g. may move to seek better paid employment

MIGRATION - The movement of people between countries or regions

51
Q

Social Environment - IMPACT OF URBANISATION & MIGRATION

A

POSITIVES:
1) increase demand and sales for a business
2) increasingly diverse workforces

NEGATIVES:
1) increased competition e.g. from overseas businesses

52
Q

Social Environment - GROWTH OF ONLINE BUSINESSES

A

POSITIVE IMPACTS:
1) lower costs if businesses starting going online
2) less employees needed –> lower unit costs
3) online businesses can reach all over the world
4) relatively cheaper

NEGATIVE IMPACTS
1) Store closures –> redundancies

53
Q

Social Environment - CORPORATE SOCIAL RESPONSIBILITY (CSR)

A

The duties a business has towards its employees, customers, society and environment

Level 1 - Economic responsibilities –> be profitable

Level 2 - Legal responsibilities –> obey the law

Level 3 - Ethical responsibilities –> be ethical

Level 4 - Philanthropic responsibilities –> be a good corporate citizen

54
Q

Corporate Social Responsibility - REASONS FOR

A

Ethical thing to do

Improves business reputation and brand image

Attractive ethically aware stakeholders

55
Q

Corporate Social Responsibility - REASONS AGAINST

A

Businesses don’t know what is in societies interests

Extra costs will be incurred which must be passed on to customers

Efficient use of resources may be restricted

56
Q

Social Environment - STAKEHOLDER CONCEPT

A

Purpose of a business is to create value for all stakeholders and not just shareholders.

Business needs to consider and keep interests of customers, suppliers, employees, communities as well as shareholders aligned with the business

57
Q

Social Environment - SHAREHOLDER CONCEPT

A

Purpose of a business is just to meet shareholder aims mainly through maximising profits

E.g. increasing share prices and dividends BUT leads to only short term profits for the business

58
Q

Competitive Environment - PORTERS FIVE FORCES

A

Analyses competitive strength of a business

Includes 5 forces:
1) threat of new entrants
2) buyer power
3) supplier power
4) rivalry
5) substitute threat

59
Q

Porter’s 5 Forces - THREAT OF NEW ENTRANTS (barriers to entry)

A

Barriers to entry - factors that make it difficult for businesses to sell products in a market for the first time e.g. brand loyalty

If new entrants move into an industry they will gain market share & rivalry will intensify

The positions of the existing firms is stronger if the barriers to entry are high HOWEVER if barriers to entry are low, then the threat of new entrants will be high

The threat of a new entrant depends on:
1) customer loyalty
2) how quickly economies of scale can be achieved
3) the new entrant ability to access suppliers

60
Q

Porter’s 5 Forces - BUYER POWER

A

Powerful customer are able to exert pressure to drive down prices. This is shown through buyers:

1) finding substitutes from other businesses
2) using extreme power to threaten to switch to cheaper suppliers, thus forcing original suppliers to drive down their prices

61
Q

Porter’s 5 Forces - SUPPLIER POWER

A

Reasons for powerful suppliers include:
1) fewer suppliers in market makes them more powerful
2) scarce availability of substitutes gives supplier greater power

If a supplier has greater bargaining power they will:
- sell their products at a higher prices
- squeeze industry profits

62
Q

Porter’s 5 forces - RIVALRY

A

Competitive rivalry will be greater when:
1) easy for customers to move to a substitute
2) when there is little differentiation between products sold
3) competitors all have similar corporate objectives

In order for businesses to compete they will:
- engage in competitive pricing
- use of promotional offers and special deals
- use of innovation

63
Q

Porter’s 5 forces - SUBSTITUTE THREAT

A

Threat of a substitute is high when:
1) when the price of a substitute product falls, it therefore makes it more attractive to customers
2) when its easier for customers to switch from one substitute to another

If there are substitutes to a businesses product, the business will lower its price to keep customers, but leads to reduced profits

HOWEVER…customer loyalty will limit the extent of this threat

64
Q

Investment Appraisal - CALCULATING PAYBACK PERIOD

A

The time it takes for a project to repay its initial investment
Expressed in terms of time e.g. days, months or years

1) Find initial investment
2) Take ‘year 1’ away from initial investment
3) Repeat but with whatever the answer (x) was from step 2
4) When you can’t take anymore away, put x over the last year and x by 365 to work out the days or months

65
Q

Investment Appraisal - CALCULATING AVERAGE RATE OF RETURN (ARR)

A

Looks at the total accounting return for a project to see if it meets the target return

Net profit = inflow - outflow

ARR (%) = total net profit / no. of years / initial costs x 100

66
Q

Investment Appraisal - CALCULATING NET PRESENT VALUE (NPV)

A

Process of analysing whether investment projects are worthwhile

TIME VALUE OF MONEY –> better to receive cash now than in the future (future cashflows are worth less) AND discount factors bring cash flows back to their present value

1) Calculate PRESENT VALUE = CASH FLOW X DISCOUNT FACTOR for each year
2) Add all present values together
3) Take initial investment away from all the present values added together

67
Q

Value of sensitivity analysis - PROS AND CONS

A

The analysis of changes in assumptions used in forecasts

PROS:
- identifies most significant assumptions
- helps assess risk and prepare for a less than favourable scenario

CONS:
- only tests assumptions at a time
- only as good as the data on which the forecasts are based on
- complicated –> not understood by all managers

AQA A-level Business (10 decks)

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